Common Tragedies

Thoughts on Environmental Economics

Bold claims

Posted by Daniel Hall on August 6, 2008

If I could, I would bet my life savings against the predictions of the current consensus climate model.

That is Will Wilkinson, responding (indirectly) to this.  I would recommend that Will contact James Annan, or perhaps the guys at RealClimate.

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7 Responses to “Bold claims”

  1. Thom said

    Wilkinson makes a good point I think people tend to ignore – because developing countries probably won’t sacrifice growth for environmental concerns, the reduction in demand for fossil fuels by developed countries as a result of carbon pricing might cause more fossil fuel consumption than doing nothing. This seems likely to me.

    While I don’t think this is a good argument for doing nothing, I do think it increases the merits of non-pricing policies. Pricing carbon, no matter how you do it, transfers fossil fuel consumption from the developed countries to the developing countries. Is it 1-to-1? Probably not, but its not 1-to-0 either. Every day that gas is “cheap” in the developing economies causes more people to buy cars and electric devices, which causes a permanent shift in the energy demand curve for developing economies. If we make our gas artificially more expensive, not only do we make theirs artificially less expensive, but we get them further addicted to the stuff we are trying drop ourselves.

    A good non-pricing policy for developed countries would be to increase the general incidence of taxes (that is, increase income or sales taxes) and use the revenue to further energy r&d. While it doesn’t reduce our fossil fuel demand by much in the short term, it does prevent the developing world from simply consuming what we would rather have kept underground in the first place. In the medium and long term, it hopefully leads to technologies that make non-fossil fuels structurally cheaper than fossil fuels, which has to be the ultimate goal of a climate change policy in the first place anyways. It is much easier to export energy technology than it is to export altruism and concern for our environmental future.

  2. Wilkinson’s point, as expressed by Thom above, is nothing more than Jevon’s paradox, a well known problem associated with the consumption of resources (originally coal).

    Wilkinson’s initial statement that the price mechanism will drive us to cleaner fuels is extremely improbable, essentially wrong, and therefore should not have been written with qualifications–and should be redacted. The price mechanism can easily lead and will most likely lead us to dirtier forms of energy. Even heavy crude, which we now must use more of, is in a sense, dirtier, full of, for example, sulfur.

    Economists should stop making statement over which they appeary to have an incomplete understanding.

  3. Rich Sweeney said

    umm it was kinda hard to take any of will’s “arguments” seriously amidst all the evidenceless hypothesizing and childish bets. i will, however, take your points seriously, tmoney.

    first, energy does not equal oil. will’s claim that any reduction in us demand for energy would be offset by an increase in foreign consumption might be somewhat plausible for oil, and possibly natural gas, but definitely not for coal, which is currently our main source of electricity. no one’s shipping coal from kentucky to china. and even with oil, there’s no way a reduction in gas consumption here is going to make china or any other third world country become as dependent on oil as america currently is. it took us a century of cheap domestic oil and massive infrastructure investments to get to where we are today. even ignoring climate concerns, countries like india and china will still care about energy security. finally, this argument completely ignores the possibility that price induced innovation (say in lithium ion batteries) here will actually reduce oil demand abroad. for all these reasons, i’d be wiling to bet your stipend next year that this ratio is a lot closer to 1-to-0 than you think ;)

    as for your proposed solution, let me make sure i’ve got this straight. you want to increase distortionary taxes in an effort to reduce the consumption of relatively inelastic goods? a sort of anti double dividend hypothesis. that’s a new one. and, as daniel and i have written before, the track record of government attempts to induce substitution through r&d alone, without altering relative prices, aint so hot.

  4. Hi Daniel, FYI, My guess is not that there will be cooling (as you seem to suggest with the links you supply), just that warming will be less than the most popular estimate, and so that in the absence of significant abatement the likely externality will be rather lower than estimated by Nordhaus. If there were a betting market, I would put my money on something like the lower bound of the IPCC estimates.

  5. Daniel Hall said

    Will, fair enough. I can’t help but point out the shift in rhetoric between your blog post and your comment here, however. You say that you would bet on “the lower bound of the IPCC estimates”. But the lower bound is still part of the estimate, and thus you are suggesting you would essentially bet on the IPCC being correct. I think the average reader would find this claim very different than a desire to place your “life savings against the predictions of the current consensus climate model”.

    Thom, thank you for highlighting Will’s point about Jevon’s paradox. I have three thoughts:

    1. In practice, the size of this effect (1-to-1? 1-to-0?) is an empirical question. How big do we actually think this effect will be given realistic climate policy in developed countries? Europe currently has a carbon price of $30-40 per ton of CO2. In more understandable terms this is equivalent to about 30 to 40 cents per gallon of gasoline. Do we really think this will have enormous near-term impacts on consumption and free up a significant portion of fossil fuels?

    2. In the near-term, rather than having developing countries increase income taxes why not encourage them to reduce fuel subsidies? If America starts taxing carbon and China eliminates its fuel subsidies it might actually be China that is enacting a larger increase on the relative price of fossil fuels compared to the current situation. Proposals such as this are definitely part of the discussions for a post-2012 climate architecture.

    3. In the medium- and long-run no way are America and Europe going to establish high prices for emissions (say $100 per ton of CO2 or more) if China and India are standing by and doing nothing. This is a dynamic problem, it’s not like we won’t see this issue coming if it starts to get really large.

  6. Thom said

    Rich, a couple points.

    First, the Kentucky does indeed export coal, though not necessarily to China. At present, we export about 5% of US production. In the past, that number has been higher. See here: http://www.eia.doe.gov/emeu/aer/txt/ptb0701.html

    Second, I’m not so convinced that it will take China and India nearly as long to get to a western level of energy consumption as you might think. Part of the reason it took us a century to get where we were is that we had to develop a lot of technology to use the energy we use today. The developing world already has that technology, so their takeup will be much faster than ours.

    Finally, it doesn’t matter if China and India never make it to US per capita consumption levels (even though that does seem to be their goal, see here: http://www.iht.com/articles/2008/06/30/business/rupee.php). If a billion people in China and another billion in India get to half of western per capita emissions, it eliminates all emissions reductions the west could feasibly do.

    I don’t think that lithium ion batteries will make the ratio anywhere near 1-to-0 in the short or medium term. It might be the case in developed countries with stringent carbon pricing and emissions standards that a PHEV would make financial sense, but not in developing countries where carbon isn’t priced.

    Yes, I do think a general distortionary tax to fund energy r&d is a legitimate long term alternative to carbon pricing, if the policy makers goal is to actually limit the stock of carbon in the atmosphere.

    Daniel, while I agree that it is important to consider the current European experience with carbon pricing, I’d argue that its too soon to estimate its effects on outside energy consumption , that the bar was set pretty low, and that it wasn’t relevant for comparison because on the whole, European carbon consumption has increased since pricing started anyway. I think a relevant comparison here is actually the historically asymmetric taxation of diesel vs. gasoline fuels in Europe (and vice versa, here). As a result of this “tax arb”, they export gasoline to us and we export diesel to them. Its obviously not an even trade, but on the net we are diesel exporters to Europe and they are gasoline importers to us.

    I’d love to have India and China reduce or eliminate fuel subsidies. Not going to hold my breath though. I think they’ll continue to do it as long as they can afford it.

  7. Rich Sweeney said

    touche. apparently we do export some coal, although about 80% of it is to canadia and europe, which means that its going to places that take climate change even more seriously than we do. (http://www.eia.doe.gov/cneaf/coal/quarterly/html/t7p01p1.html).

    i also totally agree with your point that china doesn’t have to hit u.s. per capita levels to totally undermine western climate initiatives. but you said something to the effect of our reduction in demand being merely a transference of addiction to china, and i think that wildly underestimates the unique historical circumstances of our current predicament (a la yergin’s “the prize”).

    finally i think that you and will underestimate the effect that domestic action on climate could have on international climate negotiations. at the end of the day climate change is real and you have to believe that in the limit we all have an interest in averting catastrophe (even the chinese). right now we’re just haggling over who’s gonna do what. the developing world (rightly) sees us as to blame, and therefore wants us to pick up the bulk of the tab. sure there’s a chance that china and india will continue to spew carbon regardless of what we do. but i’d be willing to bet (sarc) that the probability of the developing world agreeing to curb emissions is significantly positively correlated with our own domestic actions.

    as for the anti-double-dividend, you know me, i’m all for government r&d. it’s just that i thought you were a friedmanite , and this seems like the least efficient way we could reduce carbon emissions. what’s happened to you since i left boston? ;)

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